Threadneedle UK Equity Income: November 2021 fund update

• Richard Colwell is an experienced UK equity income investor and is supported by a large and experienced team
• The manager looks to blend higher quality, dividend-paying companies and unloved companies with more growth potentialOver the long run the fund's performed strongly, delivering better returns than its peer group average
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

The fund aims to pay a high and growing income, as well as deliver some long-term investment growth. Unlike some UK equity income fund managers, manager Richard Colwell doesn't invest outside the UK. The fund would work well in an income focused portfolio, adding a UK allocation to a global portfolio, or alongside fixed income investments.

Manager

Richard Colwell has managed the Threadneedle UK Equity Income fund since September 2010, and also ran other UK equity portfolios prior to this. Colwell is supported by a large and experienced UK equities team, including nine sector specialists, some of whom also run portfolios. He can also leverage the expertise of eight responsible investment analysts.

As well as this fund, Colwell manages the Threadneedle UK Growth & Income Fund, the Threadneedle UK Equity Alpha Income Fund and the Threadneedle Monthly Extra Income Fund, and additionally holds the position of Head of UK Equities at Columbia Threadneedle. While we recognise that these additional responsibilities need to be properly managed, we are comfortable that Colwell dedicates sufficient time to the UK Equity Income fund.

Process

The manager looks to identify companies he considers good quality – but which are currently undervalued by the market. He is careful to avoid value traps, but instead looks for good businesses with a catalyst for change which fall into three buckets; defensives which should perform well regardless of the economic backdrop, average risk which can be cyclical companies but which have little or no debt, and higher risk investments which could be highly leveraged or need some work to turn to profit. Not every company bought needs to pay a dividend at the time of purchase.

Colwell likes to take the long-term view, recognising that some of his investments, particularly in the higher risk bucket, may take time to realise what he considers to be their true value, and aims to buy and hold investments for some time, meaning low portfolio turnover. Situations where a company's profitability has fallen below its historical average, but the core franchise remains attractive are of firm interest to Colwell. Once invested, Colwell engages with a company's management with an aim to improve the fortunes of his holdings.

Colwell believes UK companies remain attractively valued, often trading at material discounts to their overseas rivals. In recent months Colwell has taken advantage of share price weakness to buy more shares in some existing holdings. These include insurer Direct Line, recruitment company Hays and food producer Tate & Lyle. He's also continued to take profits from the fund's biggest holding AstraZeneca as the shares have performed well.

The fund continues to have no money invested in oil companies, banks or miners. This is not the result of a negative view on these companies from an ESG perspective, but a preference for better opportunities elsewhere in the market.

Culture

Columbia Threadneedle was formed in 2015 when US based Columbia Management Group was merged with UK asset manager Threadneedle Investments. There have been a number of high profile fund managers leave the firm since the merger, including a number from the European equities desk. However, the UK equities team is well-resourced, and Colwell is incentivised to encourage a long-term commitment to the firm.

Columbia Threadneedle has bulked up resource on ESG (Environmental, Social and Governance) in recent years, hiring Iain Richards as Head of Responsible Investment in April 2016. Roger Wilkinson, Head of Central Research in EMEA, is also responsible for oversight of all internal ESG analysts.

ESG analysis does not lead stock selection but it is a significant input to analysis. ESG reports from the dedicated team feed into stock reviews, and without deliberately looking to run an ESG portfolio Colwell has ended up with a fund that holds many stocks highly rated by independent ESG ratings agencies.

Cost

The ongoing charge for this fund is 0.82%, but HL clients benefit from a saving of 0.23%, resulting in a net ongoing charge of 0.59%. Part of this saving is provided through a 'loyalty bonus', which is tax-free in an ISA or SIPP. However, they may be subject to tax in a Fund and Share Account. The HL platform fee of up to 0.45% per annum also applies.

Performance

Since becoming manager of the fund in September 2010, Colwell has delivered returns of 161.69%* compared with 130.84% for the IA UK Equity Income peer group average. Our analysis suggests he's added value with his stock picking over the long term. Typically, compared to peers the fund has performed better in rising markets and hasn't lost as much money in falling markets. Past performance isn't a guide to the future.

The fund has marginally lagged the peer group average over the past 12 months as markets have rebounded strongly from the losses of the previous year. Our analysis suggests that the fund's investments in WM Morrison Supermarkets, Electrocomponents PLC and RSA Insurance Group have been the strongest performers of this period. In contrast, investments in life insurer Phoenix group, pest control company Rentokil Initial and consumer goods manufacturer Unilever have been the weaker performers.

Colwell is optimistic about the income outlook and thinks there's a solid base for dividend growth from here. The fund currently yields 3.02%. Yields are variable and should not be seen as a reliable guide to future income. Remember charges can be taken from capital which increases the yield but reduces the potential for capital growth.

Past performance is not a guide to the future. Source: *Lipper IM to 31/10/2021.

Find out more about Threadneedle UK Equity Income, including charges

View Threadneedle UK Equity Income Key Investor Information